Commentary Magazine


Topic: housing crisis

Housing Collapse Has a Lesson for the Ages

Earlier this month the New York Times ran a feature on the newest discipline to come to college campuses: capitalism. Major universities in the United States are now going to start devoting some class time to learning about it. Which is another way of saying they will learn about America.

Conservatives often complain that liberals talk about conservatism as if they’ve only heard vague rumors about this bizarre species, mostly because it’s easy to avoid conservative opinion if you want to. But they’ll also justly complain that major liberal institutions, like the mainstream media and universities, don’t understand capitalism, and don’t seem to want to. Yet these institutions shape young minds.

There are many choice quotes in the Times article about the sudden interest their own country, but this one stands out:

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Earlier this month the New York Times ran a feature on the newest discipline to come to college campuses: capitalism. Major universities in the United States are now going to start devoting some class time to learning about it. Which is another way of saying they will learn about America.

Conservatives often complain that liberals talk about conservatism as if they’ve only heard vague rumors about this bizarre species, mostly because it’s easy to avoid conservative opinion if you want to. But they’ll also justly complain that major liberal institutions, like the mainstream media and universities, don’t understand capitalism, and don’t seem to want to. Yet these institutions shape young minds.

There are many choice quotes in the Times article about the sudden interest their own country, but this one stands out:

While most scholars in the field reject the purely oppositional stance of earlier Marxist history, they also take a distinctly critical view of neoclassical economics, with its tidy mathematical models and crisp axioms about rational actors.

That about sums it up. They may not like the “purely oppositional” (read: given to mass murder) nature of Marxist history, but they don’t like the rationality of capitalism either. They have now designed the perfect course for those students who have an interest in economics but don’t like numbers or genocide.

But one thing conservatives have been known to repeat ad nauseam about capitalism is that it is truly race-blind. In a market economy, the basic trade principle of mutual benefit based on rational self-interest dominates. And attempts to distort the market in favor of one racial or ethnic group can end up helping that group marginally in the near term while hurting that group in the long term. On that note, those college professors just starting to explore capitalism might want to take a look at today’s New York Times report on the housing bust and the recession:

The Urban Institute study found that the racial wealth gap yawned during the recession, even as the income gap between white Americans and nonwhite Americans remained stable. As of 2010, white families, on average, earned about $2 for every $1 that black and Hispanic families earned, a ratio that has remained roughly constant for the last 30 years. But when it comes to wealth — as measured by assets, like cash savings, homes and retirement accounts, minus debts, like mortgages and credit card balances — white families have far outpaced black and Hispanic ones. Before the recession, non-Hispanic white families, on average, were about four times as wealthy as nonwhite families, according to the Urban Institute’s analysis of Federal Reserve data. By 2010, whites were about six times as wealthy….

Many experts consider the wealth gap to be more pernicious than the income gap, as it perpetuates from generation to generation and has a powerful effect on economic security and mobility. Young black people are much less likely than young white people to receive a large sum from their parents or other relatives to pay for college, start a business or make a down payment on a home, for instance. That, in turn, makes their wealth-building prospects shakier as they move into adulthood.

The Times explains why minorities are suffering more during the current economic downturn:

Two major factors helped to widen this wealth gap in recent years. The first is that the housing downturn hit black and Hispanic households harder than it hit white households, in aggregate. Many young Hispanic families, for instance, bought homes as the housing bubble was inflating and reaching its peak, leaving them saddled with heavy debt burdens as house prices plunged in places like suburban Phoenix and inland California.

Black families also were hit disproportionately by the housing collapse, because heading into the recession housing constituted a higher proportion of their wealth than for white families, leaving them more exposed when the market crashed. Higher unemployment rates and lower incomes among blacks left them less able to keep paying their mortgages and more likely to lose their homes, experts said.

And the housing bubble and bust were brought about in part by well-intentioned presidents from both parties trying to expand home ownership. But George W. Bush’s attempts to rein in the lending practices of the government-sponsored lenders and improve federal oversight were stymied, most effectively by Massachusetts Democrat Barney Frank.

That housing slump will forever be a major part of Frank’s legacy. And as the Times story notes, the widening of the wealth gap, especially during a down economy with high unemployment, can have lasting effects by constricting the generational transfer of wealth and enabling the wealth gap to persist or widen further even as the economy recovers.

Of course, leftist ideologues would love for this to be a tale of rapacious capitalists bent on profiting by stealing the wealth of minorities. The reality is that the government was only trying to help, and ended up doing lasting damage. It’s a familiar story with an important lesson that American academia’s newly minted professors of capitalism will have a hard time avoiding.

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A Few Fiscal Facts

James Glassman, the executive director of the George W. Bush Institute and a Forbes contributor, has written a piece on the facts about budget deficits and how various presidents truly rank.

The inspiration for Glassman’s piece was a comment by former Governor Howard Dean, who was asked what specific policies in the Bush administration he thinks are still being used to explain an unemployment rate of more than eight percent. To which Dean responded, “The biggest ones are the deficits that were run up…. The deficits were enormous.”

All of which caused Glassman to do something that Dean did not: consult the facts in various economic reports. Here is the key paragraph:

As for spending itself, during the George W. Bush years (2001-08), federal outlays averaged 19.6 percent of GDP, a little less than during the Clinton years (1993-2000), at 19.8 percent and far below Reagan, whose outlays never dropped below 21 percent of GDP in any year and averaged 22.4 percent. Even factoring in the TARP year (2009), Bush’s average outlays as a proportion of the economy was 20.3 percent – far below Reagan and only a half-point below Clinton. As for Obama, even excluding 2009, his spending has averaged 24.1 percent of GDP – the highest level for any three years since World War II.

I would only add that under Bush the deficit fell to 1 percent of GDP ($162 billion) by 2007, the penultimate year of the Bush presidency.

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James Glassman, the executive director of the George W. Bush Institute and a Forbes contributor, has written a piece on the facts about budget deficits and how various presidents truly rank.

The inspiration for Glassman’s piece was a comment by former Governor Howard Dean, who was asked what specific policies in the Bush administration he thinks are still being used to explain an unemployment rate of more than eight percent. To which Dean responded, “The biggest ones are the deficits that were run up…. The deficits were enormous.”

All of which caused Glassman to do something that Dean did not: consult the facts in various economic reports. Here is the key paragraph:

As for spending itself, during the George W. Bush years (2001-08), federal outlays averaged 19.6 percent of GDP, a little less than during the Clinton years (1993-2000), at 19.8 percent and far below Reagan, whose outlays never dropped below 21 percent of GDP in any year and averaged 22.4 percent. Even factoring in the TARP year (2009), Bush’s average outlays as a proportion of the economy was 20.3 percent – far below Reagan and only a half-point below Clinton. As for Obama, even excluding 2009, his spending has averaged 24.1 percent of GDP – the highest level for any three years since World War II.

I would only add that under Bush the deficit fell to 1 percent of GDP ($162 billion) by 2007, the penultimate year of the Bush presidency.

As for the financial crisis of 2008, which obviously had a significant effect on the budget deficit, Democrats bear the majority of the blame for blocking reforms that could have mitigated the effects of the housing crisis, which in turn led to the broader financial crisis.

As Stuart Taylor put it  in 2008:

The pretense of many Democrats that this crisis is altogether a Republican creation is simplistic and dangerous. It is simplistic because Democrats have been a big part of the problem, in part by supporting governmental distortions of the marketplace through mortgage giants Fannie Mae and Freddie Mac, whose reckless lending practices necessitated a $200 billion government rescue [in September 2008]. … Fannie and Freddie appear to have played a major role in causing the current crisis, in part because their quasi-governmental status violated basic principles of a healthy free enterprise system by allowing them to privatize profit while socializing risk.

The Bush administration warned as early as April 2001 that Fannie and Freddie were too large and overleveraged and that their failure “could cause strong repercussions in financial markets, affecting federally insured entities and economic activity” well beyond housing. Bush’s plan would have subjected Fannie and Freddie to the kinds of federal regulation that banks, credit unions, and savings and loans have to comply with. In addition, Republican Richard Shelby, then chairman of the Senate Banking Committee, pushed for comprehensive GSE (government-sponsored enterprises) reform in 2005. And who blocked these efforts at reforming Fannie and Freddie? Democrats such as Senator Christopher Dodd and Representative Barney Frank, along with the then-junior senator from Illinois, Barack Obama, who backed Dodd’s threat of a filibuster (Obama was the third-largest recipient of campaign gifts from Fannie and Freddie employees in 2004).

So the current president and his party bear a substantial (though not exclusive) responsibility in creating the economic crisis that Obama himself inherited.

In any event, Jim Glassman has performed a useful public service, if only in deploying (to paraphrase Thomas Huxley) a few fiscal facts to slay a beautiful, if false, deduction.

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Obama’s Sign of Madness

During remarks in Portland, Maine, on Friday, President Obama said, “We won’t win the race for new jobs and new businesses and middle-class security if we cling to this same old, worn-out, tired ‘you’re on your own’ economics that the other side is peddling. It was tried in the decades before the Great Depression. It didn’t work then. It was tried in the last decade. It didn’t work. You know, the idea you would keep on doing the same thing over and over again, even though it’s been proven not to work. That’s a sign of madness.”

You might think that a man who is on track to have the worst jobs record of any president in the modern era and is presiding over the weakest economic recovery since the Great Depression — not to mention the first credit rating downgrade in American history, the longest stretch of high unemployment since the Great Depression, chronic unemployment that is worse than the Great Depression, a housing crisis that is worse than the Great Depression, a standard of living for Americans that has fallen further and more steeply than at any time since the government began recording it five decades ago, and a record increase in the number of people who are in poverty — would be a little more careful when it came to lecturing the rest of us when it comes to what works in economics.

You might even say it was a sign of madness.

 

During remarks in Portland, Maine, on Friday, President Obama said, “We won’t win the race for new jobs and new businesses and middle-class security if we cling to this same old, worn-out, tired ‘you’re on your own’ economics that the other side is peddling. It was tried in the decades before the Great Depression. It didn’t work then. It was tried in the last decade. It didn’t work. You know, the idea you would keep on doing the same thing over and over again, even though it’s been proven not to work. That’s a sign of madness.”

You might think that a man who is on track to have the worst jobs record of any president in the modern era and is presiding over the weakest economic recovery since the Great Depression — not to mention the first credit rating downgrade in American history, the longest stretch of high unemployment since the Great Depression, chronic unemployment that is worse than the Great Depression, a housing crisis that is worse than the Great Depression, a standard of living for Americans that has fallen further and more steeply than at any time since the government began recording it five decades ago, and a record increase in the number of people who are in poverty — would be a little more careful when it came to lecturing the rest of us when it comes to what works in economics.

You might even say it was a sign of madness.

 

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America’s Housing Crisis (Continued)

According to press reports, home prices dropped for the fifth consecutive month in January, reaching their lowest point since the end of 2002.

The average home sold in that month lost 0.8 percent of its value, compared with a month earlier, and prices were down 3.8 percent from 12 months earlier, according to the S&P/Case-Shiller home price index of 20 major markets.

Home prices have fallen a staggering 34.4 percent from the peak set in July 2006.

“Despite some positive economic signs, home prices continued to drop,” said David Blitzer, spokesman for S&P. “Eight cities — Atlanta, Chicago, Cleveland, Las Vegas, New York, Portland, Seattle and Tampa — made new lows.”

This development comes in the wake of 2011, the worst sales year on record for housing. The housing crisis is now worse than the Great Depression. And the home ownership rate (59.7 percent) is the lowest since 1965.

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According to press reports, home prices dropped for the fifth consecutive month in January, reaching their lowest point since the end of 2002.

The average home sold in that month lost 0.8 percent of its value, compared with a month earlier, and prices were down 3.8 percent from 12 months earlier, according to the S&P/Case-Shiller home price index of 20 major markets.

Home prices have fallen a staggering 34.4 percent from the peak set in July 2006.

“Despite some positive economic signs, home prices continued to drop,” said David Blitzer, spokesman for S&P. “Eight cities — Atlanta, Chicago, Cleveland, Las Vegas, New York, Portland, Seattle and Tampa — made new lows.”

This development comes in the wake of 2011, the worst sales year on record for housing. The housing crisis is now worse than the Great Depression. And the home ownership rate (59.7 percent) is the lowest since 1965.

All of this matters a great deal because housing is the biggest asset many people have. For most people, buying a house will be the biggest investment they make; more of their wealth is locked up in housing than any other investment. And so a large contraction of wealth and people’s net worth – with home prices dropping more than a third in the last five years – has tremendous ripple effects, including on consumption.

So long as the housing market is this sick, the economic recovery will be, at best, fragile.

This is not the kind of record Barack Obama wants to defend; but it’s one the Republican nominee, if he’s wise, will force the president to defend. Because while it’s true the housing collapse didn’t start on Obama’s watch, it’s just as true he’s done nothing to reverse the collapse. Like in so many other areas, the housing situation has gotten worse, not better, under Barack Obama’s stewardship. The GOP rallying cry this year might consist of only two words: Had Enough?

 

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